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Departures: Websites that have dropped out of the top 15 are: passport.net, microsoft.com, 3721.com, daum.net, amazon.com.

Video sharing (YouTube), social networking (MySpace and Orkut), collaborative editing (Wikipedia) and Microsoft's new Live search project are hot, but let's drill deeper down Alexa's ranking list for confirmation of trends.

Where the Internet Crowds Are Going

By categorizing each of the top 100 websites by type (e.g., Google is for search, Yahoo is a portal, Amazon and eBay are commerce-oriented, etc.) and ranking each by its growth in "reach" (defined as percentage of all Internet users who use the particular website, based on data from Alexa) over the past two years (November 2004 through November 2006), we can see what types of websites are growing in popularity and which are not. Here's the result, showing how fast various categories have extended their reach (fastest growing categories higher up on list), with representative examples of the fastest growing websites in each category:

Category Trends: The above list illustrates the increasing importance of Web 2.0 as a platform for user-generated content (video clips on YouTube, photos on Flickr, blogs on Blogger, re-mixing of music and other media content on MySpace, collaborative wiki-style editing on Wikipedia, user-selected news on Digg). Even the fastest growing websites in the more traditional portal and commerce categories are built on user-participation (e.g., instant messaging on QQ, and for-sale and help-wanted ads on Craigslist), indicating just how pervasive Web 2.0 content has become. The power of search also derives from user-generated content, since blogs, photos, wiki articles and other content generated by all of us out in the "long tail" of the distribution feed the search engine bots crawling the web 24 hours a day.

We can also group the websites geographically to see which regions of the world have the fastest growth. In order of growth in reach (with faster growth higher up the list), the ranking by geographical region, with examples of high growth websites in each category, is:

Geographical Trends: The regions with the fastest overall growth are South America (especially Brazil, Chile and Argentina), Mexico, Eastern Europe (Poland) and Russia. The U.S. is home to many of the fastest growing websites, such as YouTube, Wikipedia, Blogger and MySpace; however, older U.S. websites, such as Yahoo, MSN, eBay, AOL, have actually shrunk in terms of percentage reach over the past couple of years, creating a "middle of the road" performance for U.S. websites as a whole. Asia has its share of rapidly growing websites, such as Baidu and Tencent's QQ; however, there are also many older websites, such as Sina and Sohu in China and Naver and Daum in Korea whose reach has contracted noticeably. Another trend evident from the list is that the fastest growing websites in many of the regions are localized Google properties, such as Google Brazil, Google Poland, Google India, Google U.K. and Google in Arabic for the Middle East.

Extrapolating Recent Trends

We can use the Alexa data to obtain a rough sense for what the online world might look like a couple of years from now. The chart to the right shows a list of today's top websites by reach. Yahoo, Google and MSN occupy the top three slots, all showing over 25% reach. These dominant websites are followed by a combination of Chinese (Baidu, QQ, Sina, 163 (Netease), Sohu) and U.S. (YouTube, Wikipedia, Microsoft, Blogger, MySpace, etc.) websites, each with reach in the 3% to 9% range.

The next chart shows the websites with the highest growth in reach over the past two years. Leading the list is Google, whose reach leaped ahead more than 10 percentage points (from 17% in 2004 to 27.5% today). Among the U.S.-based websites, YouTube, Wikipedia, Blogger, MySpace and Orkut all showed increases in reach of three to six percentage points. The Chinese sites QQ and Baidu extended their reach by an additional four percentage points. Two recently launched sites that have grown very rapidly are Yahoo China (sold by Yahoo last year to Alibaba; Yahoo in turn holds a 40% equity stake in Alibaba) and Microsoft's Live (part of Ray Ozzie's plan to revamp and reposition the company's web properties).

We can make a very crude estimation of what the distribution of website reach could look like in two years' time by simply extrapolating past growth trends into the future:

Obviously, as has always been true of the Internet, there will undoubtedly be new websites that surface and rise to popularity over the upcoming two years. However, the linear extrapolation at least gives us a very rough feel for how current momentum will impact Internet growth. The "linear" scenario indicates a world increasingly dominated by Google, though Yahoo and MSN remain important portals. Fast-growing YouTube, Baidu, Wikipedia and QQ rise beyond 10% reach, with Blogger, MySpace and Orkut close behind.

Implications for Stock Investors

The future is a Google world (as least for now). Google controls not just search; it also owns some of the fastest growing web properties: YouTube, Blogger and Orcut. Internationally, Google is clearly the dominant search provider (Google Canada, U.K., Germany, France, Spain, Italy, Poland, Brazil, Mexico, Chile, Argentina, Japan and India all rank in the top 100 websites), though notable exceptions are in China (with Baidu) and Russia (with Yandex) where local players have larger market share. With paid search-related advertising being a business that scales well to capture previously untapped demand from so many small- and medium-sized businesses in the "long tail" of the distribution, Google unquestionably occupies a "sweet spot" of growth. At trailing and forward P/E ratios of 63 and 36, respectively, Google's shares might not seem cheap; however, buying Google (GOOG) on any significant price dips is a worthy strategy to consider. I believe that a forward PEG of less than one, currently corresponding to a stock price of $13.70 x 32.5 = $445, would be an attractive entry point. That's a 10% discount from Google's $496 closing price today.

China is the growth story of the 21st century but certain websites are clearly growing much faster than others. Dominant Chinese search provider Baidu (BIDU) (see prior post) and Tencent's QQ portal (shares listed in Hong Kong) are interesting ways to participate in triple-digit annual growth.

Yahoo (YHOO) (owner of rapidly growing photo-sharing site Flickr; also participating in the rapid growth of Yahoo China through its equity interest in Alibaba) and Microsoft (MSFT) (with Live search) offer ways to tap into growth but appear at this juncture to be more traditional web and software investments than high-growth "pure" plays. However, if Yahoo and Microsoft should succeed in capturing search market share back from Google, expect to see good upside in their stock prices as well.

These web traffic trends echo the ongoing transformation taking place in both how we use the Internet and who uses the Internet. Driven by active participation from a younger demographic, we are seeing spontaneous, user-generated content replace more formal, "newspaper-style," company-provided content. As the YouTubes, Googles, MySpaces, Bloggers and Wikipedias of the world steal eyeballs from the older portals and commerce sites, the "business model" of the Internet continues to shift further towards advertising. Interestingly, at least in general, business-model terms, advertising becomes as central as it is in the traditional "free" (i.e., no charge to viewer or listener) TV and radio industry. However, this time around, ad spending (supply side) is coming from small, local businesses, as well as the traditional, large corporate advertiser; likewise, instead of being limited to just 10 or 20 channels, we now potentially have as many channels as there are participants (demand side).

So, where's the Internet taking us? To use a programming analogy attributed to Tim Berners-Lee (see discussion here), if stage one (Web 1.0) was about reading available information at portals sites and elsewhere on the Internet, and stage two (Web 2.0) is now about writing and contributing our own content to the mix, it does appear useful to think of the next stage (Web 3.0) as an execution layer, i.e., fertile ground for the so-called "semantic web" with programs capable of at least rudimentary natural language understanding--a partial realization of the "smart" machines that artificial intelligence has promised for decades. . . . Clearly, we are not there yet but, as the history of technology has repeatedly shown, the opportunities for entrepreneurs and investors will only get better.

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